Why To Opt For Equity Investment?

Quite often we are asked, why should one invest in equities. The Indian economy is gloomy. Political instability tends to hog most pages of the newspapers. The global economy is not supporting the news flow in any way. In this uncertain scenario, why should one take a Risk At all? Why not put all your money in a safe haven of ‘Debt’.

Firstly, we are living in an environment where inflation has been high and expected to remain high on the average in the coming years. If one were to assume Inflation to be at 9%, then let us evaluate the ability of a debt instrument to protect your wealth. A typical bank fixed deposit yields about 9% nowadays. Assuming 30% tax on the interest earned, your post tax return on the Fixed Deposit is 6.3%. As a result, your wealth loses 2.7% each year. This essentially mean, if you start with Rs 100, at the end of a 10 year period the purchasing power of your wealth will be Rs 79.8. If you believe inflation is here to stay, then investing in fixed deposits is a high risk investment as it is ‘Certain’ that you will lose the purchasing power of your wealth.

On the other hand, equities have historically delivered an annualised return of almost 17%. On an average, equities have a proven ability to protect your capital against inflation and provide a real rate of return. There are some periods where this return has been lower and other periods when it is higher. But, at least equities have an ‘Expected’ probability of delivering returns ahead of inflation.

Equity markets have been flat for almost 5 years and based on its historical record, it should catch up with its averages sometime. We do agree that the world at large is not looking great now. On the other hand, there have been several such periods in the past and the global economy has always survived through such crises. It is periods like this that provides a great opportunity for equity investors. We continue to believe it is an exciting time to invest in equities.

What’s Better? Investing in Equity Mutual Funds or Directly in Stocks

Investment and risk taking go hand in hand. Whenever you are putting your hard-earned money into something you hope to receive great returns from, you are running the possibility of either becoming richer overnight or losing that much and even more. To put it simply, an investment is a gamble which requires considerable research, vision, and educated guesswork.

It is widely assumed that making investments through mutual funds is a safer option than the latter. This is primarily because it is handled by professional fund managers who ensure that they select stock portfolios which guarantee successful long-term returns. . And sources tell us that an increasing percentage of the average Indian population is turning towards mutual fund investments. And here’s why.

Professional money managers

Mutual fund investments require professional help from a fund manager whose only mandate is to expressly monitor and manage the investments that his fund makes. As an investor, you do not have to spend time examining the fund manager’s personal history. Rather, you should go by his or her past experience – the kind of returns they have managed to procure over the years – and decide on the basis of that. The many components to making an investment, which include picking stocks, tracking them, making sector and asset allocation, and booking profits when required, are all handled by the fund manager. The investor only has to check from time to time if the fund manager is sticking to the mandate and delivering a return superior to the corresponding index.

Stable returns

More often than not, mutual finds ensure more stabilised returns on your investments than direct investment in stocks. The latter, though it holds the possibility of procuring even higher returns than the ones garnered from mutual funds, always entail a greater risk, considering that a stock value and price can change dramatically within the matter of days.

Tax-benefits and lower cost of investing

Mutual funds provide a tax benefit of up to rupees one lakh under Section 80C when you invest in an equity-linked savings scheme, which has a lock-in period of three years. Additionally, there is no capital gains tax on stocks sold by the fund, as long as you hold your equity fund for a year or longer to avoid short-term capital gains tax on the investment, which can subsequently lead to significant benefits for you as an investor in that fund. This is in comparison to the amount you have to pay if you’re making direct investments on portfolios that you choose yourself. At the same time, the cost of investing is significantly lower for mutual funds than direct stock investing. While you will be required to pay 0.5 to one percent as brokerage along with additional demat charges for buying and selling shares directly, mutual funds pay only a fraction of the brokerage charged to individual investors on account of their scale. Additionally, mutual fund investors do not require a demat account.

As can be seen from the above discussion, it is not the mutual fund that carries the risk, but the underlying investments where the mutual fund has invested.

When I Have A Demat Account, Why Should I Use A Mutual Fund?

Making investments on your own or hiring fund managers? What makes more sense for you?

What it takes to beat a mutual fund manager?

Investing well, without losing money, is not just some random activity. There are over 5,000 listed companies in India, and the top 250 companies represent over 80% of the market value. The remaining 4,500+ are all small companies whose business prospects fluctuate a lot. This extreme up and down fluctuation in the share prices of small companies is what generates excitement and greed in an emotional roller-coaster. Daily spam SMS text messages from unknown brokers do not help.

So what should you do?

If you have a job from Monday to Friday, stop wasting time dabbling in investing directly. Go through a professional fund manager – usually, he or she works at a mutual fund. You trust trained professionals in other spheres of your life, do that with your money too.

Exercise / do yoga/ run marathons to build the mental resilience and fortitude that is absolutely needed to stay steady through up and down market cycles. Share prices do not go up in a straight line and there will be many periods where your conviction will be tested. You need to stay healthy to stay invested for the long-haul and benefit from compounding.

Ultimately you need to clearly understand what you’re good at, and what you’re not (your “circle of competence”). Focus on what you’re good at and outsource the rest to trained professionals – be it a doctor, a lawyer, a gym instructor or mutual fund manager. Focus your time on making more and saving more, both of which are under your control. Just because you can, doesn’t mean you should.

Saving Taxes Is Not A Cashback Deal, It’s An Opportunity To Create Wealth

Tax saving investments are an opportunity to start your journey of creating wealth. Evaluate your tax saving options carefully, before investing.

This is the season for saving taxes. Half of all Insurance policies sold and tax saving investments made are in January, February and March – the last 3 months of the financial year.

This frenzy is driven by our deep-rooted aversion to paying taxes. The first investment most people will make is for tax saving. Most of them will invest approximately one month of their salary (a significant amount) to save taxes, without really evaluating their options. Or even stopping to consider what it is that they are really doing.

Tax breaks offered on your investments are not in the nature of a discount or cashback – even though it feels like that. You invest 10,000 and you immediately get a benefit in your salary slip. Instead, they are an incentive for you to prepare for the long term. Just consider the range of investment options that qualify for a tax break: your employee provident fund contribution (meant for retirement) qualifies for it, so does your Public Provident Fund; Life Insurance is supposed to replace your earning capacity for your loved ones, it too qualifies for a tax break; equity funds help you beat inflation over the long term, they figure in the list too.

All of these are long-term investments – preparing you financially for a distant future.

Tax saving investments are an opportunity to start your journey of creating wealth. So please take time to carefully evaluate your options and don’t just save tax – take your first step to create wealth for a secure future.

Investing in balanced funds? Look beyond tax gains

The objective of these funds is to provide capital growth via a mix of equity and debt: blend of growth and safety. Balanced funds invest around 70% of the money in equities and rest in bonds.In the recent past, mutual fund assets have grown significantly. The highest percentage growth has been in Balanced Funds.

The reasons for this growth are as follows: (a) equity valuations being stretched, the exposure to the market is defensive as compared to 100% equity exposure (b) tax efficiency is same as that of equity funds and (c) regular dividends.

The correct perspective

Let us look at the three reasons mentioned above. The first rationale is, asset allocation done by the fund manager without the investor doing it himself , which has the advantage of discipline, i.e., the fund manager does the portfolio rebalancing from time to time. The second rationale is what we will discuss now, on tax treatment after the Union Budget and revised taxation of equity funds. The third reason, regular dividends, goes against the grain of long-term growth-oriented investing. A market growth-based investment, meant for the long term, should be differentiated from a Post Office Monthly Income Scheme; it is not meant to give regular dividends. If you require regular cash flows, you should do your financial planning accordingly.

Taxation rules

The current tax treatment, valid till March 31, 2018, is that dividends from Balanced Funds are tax-free, i.e., there is no dividend distribution tax (DDT). The Union Budget has changed it effective April 1, 2018; there is a DDT of 10% plus surcharge and cess, i.e., 11.65%. As against this, the DDT rate on debt funds, with marginally increased cess from April 1, is 29.1% for individuals and 34.94% for corporates. Let us now compare the current tax efficiency of Balanced Funds with the revised one applicable from April 1, 2018. Let us say, there is a dividend of Rs 100 paid out by a Balanced Fund, and the allocation of the fund is 70% in equity and 30% in debt. Currently, DDT is nil. As against this, if the allocation is made as 70% in an equity fund and 30% in a debt fund, the DDT would be (70 x 0) plus (30 x 28.84% for individuals) = Rs 8.65 for individuals. That is, the tax efficiency in Balanced Fund over focused allocation is 8.65%. Now we will see how it looks in the revised scenario. The DDT in the Balanced Fund will be Rs 100 x 11.65% = Rs 11.65. The DDT in the focused allocation will be (70 x 11.65%) plus (30 x 29.1% for individuals) = Rs 16.86. Hence, the tax efficiency in the Balanced Fund over focused allocation is (Rs 16.86 – Rs 11.65) = 5.23%. There will be a tax efficiency, but to a lower extent, i.e., 5.23% vis-à-vis 8.65%, under the assumptions.

The crux of the matter is, investments should be decided on fundamental parameters, i.e., what the investment is worth. Tax efficiency is relevant as an additional parameter, not as the sole decision criterion.

Finally, find out where the fund manager invests both in the equity and the debt portfolio. As an investor you need to decide which style suits your portfolio. Also find out where the fund manager puts the money in the debt portion.

REASONS FOR LOSING MONEY WHEN YOU INVEST

The majority of the investors buy when the market has already run up and is valued expensively. This often leads to disappointment when the market either goes down or sideways for years. If you avoid doing what others do and invest regularly in top fund schemes, you can easily make money from your mutual fund investments

Naturally, when we burn our fingers, our first reaction is to shut the doors on that option. In investments too, we seldom look back to know why we lost money. Were we wrong, or were the markets? But in equity markets, or specifically, in a product like mutual funds, if the market was wrong, then why does it continue to have people investing and making money? Why is it that internationally, they are known to be proven vehicles to build long-term wealth?

Most of the times when a loss is incurred, the fault lies with investors and no one else. Here are a few obvious reasons  on why we lose money when we could have avoided it.

Not having a time frame to invest

How long you would like to keep the money invested is a very personal decision. It would depend on a host of factors like your saving goals, income, expenses and other investments. But, when investing for the long-term, it is always a good idea to invest systematically.

Not having a time frame compounds your errors. One, it makes you set wrong return expectations (like expecting double-digit returns in a short period); two, it pushes you to choose unsuitable products (choosing an equity fund for a one-year time frame) and three, it prompts you to exit at wrong times (panicking and exiting when markets are down soon after you invest).Having a goal naturally puts a time frame for your investments and helps you choose the right product in line with your time frame and return expectations.

Not knowing that trading and investing are different

Many investors start by saying they will stay ‘invested’ for the long term but they buy a fund hoping it will zoom right away; if it does not – they sell it. Then there are others who stop their SIPs when the market moves a bit one month, thinking that they should not be averaging at higher costs.

These are certainly not investing strategies and will also not fetch you money. They only delay the process of building wealth and often times harm your portfolio. Besides, products such as mutual funds are simply not built for ‘trading’.

If you are an investor, the only reason why you exit should be when you near your goal or your fund is really an underperformer vis-a-vis the market.

Not having a perspective on return expectations

“I got only 15 per cent on my mutual fund. I expected at least 25 per cent returns. I don’t want to invest more” is not an uncommon statement. So what are your other options for getting that 25 per cent return? Because there is no guarantee. But it is precisely for the risk that you take that you are rewarded far higher returns than the other options. Hence, you will do well to see how much you get over your other options or simply over inflation, rather than setting a number that perhaps has no basis.

Now, can you think of a stronger reason for losing money than not knowing the product you are investing in.